Modeling Demand for Mortgage Loans Using Loan-Level Data

Abstract This paper is concerned with modeling the demand for mortgage loans. The demand for loans can be represented as two functions: probability of borrowing and the loan amount, depending on borrower-specific characteristics, contract terms and set of macrovariables. The decision-making process for borrowing can be described as the sequence of decisions on: (1) choosing the credit program; (2) approving of a borrower; (3) choosing contract terms from a feasible set; (4) and loan performance. The author proposes an econometric approach that deals with endogeneity and self-selection of borrowers when estimating the demand-for-loan equations and specifies the structure of data that is required for implementation.